GDP growth always gets a lot of attention, but when it comes to determining how people are doing it’s interesting to look at other indicators that focus more on the actual material conditions of households. Let’s focus on a few alternative indicators to see how households in Ireland are doing.

Real household disposable income per capita grew at the same pace as real GDP per capita in Q4 2016, both increasing 2.3% from the previous quarter. However, that does not mean that real GDP and real household income always grew in tandem as shown in chart 1. Real household income levels in Ireland only recently returned to their pre-crisis level (the index was 103.5 in Q4 2016 from a baseline value of 100 in Q1 2007 before the economic crisis), following more than 7 years below that level. On the other hand, real GDP per capita is up more than 27% since Q1 2007 (the index was 127.3 in Q4 2016) due to the remarkable growth rate seen in Ireland in Q1 2015.

What occurred in Ireland in 2015 reflects the growing importance of global value chains, combined with the increasing importance of “intangible assets” used in production, as multinational enterprises (MNEs), in particular, have sought to maximise profits and minimise costs, including through optimisation of their global tax burden, by (re)allocating some of their economic activities in different parts of the world. In 2015, MNEs relocated intangible assets to Ireland, where these assets are being used by Irish enterprises (including Irish affiliates of foreign MNEs) to generate value added.

This is an excellent example of why GDP should not be interpreted as an indicator of the purchasing power or the material well-being of a country. GDP is primarily a gross measure of economic activities on the economic territory of a country, and of the income generated through those activities. High levels of GDP thus do not necessarily mean high levels of income flowing to the residents nor does it mean that their growth rates will be similar(read this post for an explanation on Irish GDP large increase in 2015). A major reason is that some of the income generated by production may be repatriated to non-residents, for example in the case of income generated by affiliates of multinational enterprises.

The divergence between GDP and household disposable income can clearly be seen in Chart 1 with real GDP per capita growing sharply (by 21.3% in Q1 2015 from the previous quarter), while real household income increased by only 1.6%.

Chart 1

The presence of a significant number of foreign affiliates of MNEs (responsible for around half of Ireland’s business sector GDP, that is to say, excluding agriculture, most self-employment, the public sector and some financial services activity) is not the only reason why there can be a divergence between the growth of household income and GDP. Government interventions can also play a role.

As GDP was contracting throughout the quarters of 2008, household income was sustained by increased unemployment benefits and other social benefits received by households. As a result, between Q1 2008 and Q4 2008, the net cash transfers to households’ ratio showed a sharp increase; see Chart 2. Since Q4 2010 the ratio has trended down.

Chart 2

Confidence, consumption and savings

Household disposable income is a meaningful way to assess material living standards, but to get a fuller picture of household material well-being one may also want to look at households’ consumption behaviour.

Consumer confidence (chart 3) trended upward, from a low seen in Q1 2009, until Q4 2015 when it reached its peak (104.7). Since then it has been declining to 103.0 in Q4 2016, yet still 10 points higher than Q1 2009.

Chart 3

Despite the recent downward trend in consumer confidence, the increase in household income helped boost real household consumption expenditure per capita (chart 4), which rose 0.5% in Q4 2016 from the previous quarter (from 95.7 in Q3 2016 to 96.2 in Q4 2016). Since Q1 2013 real household consumption expenditure per capita has increased in line with developments in real household income. However, Irish households are still buying less goods and services than before the crisis.

Chart 4

Because household income increased more than final consumption expenditure, the households’ savings rate (chart 5), which shows the proportion that households are saving out of current income, increased 1.2 percentage points to 13.5% in Q4 2016. The ratio has been trending up since Q1 2016, suggesting that households remain cautious about their future income.

Chart 5

Debt and net worth

The households’ indebtedness ratio, i.e. the total outstanding debt of households as a percentage of their disposable income, may reflect (changes in) financial vulnerabilities of the household sector and provides a useful yardstick to assess their debt sustainability.

The household indebtedness ratio dropped considerably since the crisis, by nearly 75 percentage points, from its highest point in Q4 2009 (230% of disposable income, compared with 155 % of disposable income in Q4 2016). This corresponds to the largest drop in the debt ratio seen amongst OECD countries. The decline was driven by a decrease in loans (primarily mortgages) and rising household income.

Chart 6

When assessing households’ economic vulnerabilities, one should also look at the availability of assets, preferably taking into account both financial assets (saving deposits, shares, etc.) and non-financial assets (for households, predominantly dwellings). Because information on households’ non-financial assets is generally not available, financial net worth (i.e. the excess of financial assets over liabilities) is used as an indicator of the financial vulnerability of households.

In Q4 2016, households’ financial net worth was stable at 214 % of disposable income (chart 7). Since Q1 2009, it has been trending up driven primarily by the reduction in household debt (as seen in chart 6) and increasing financial assets (mainly pension assets and currency and deposits). Between 2009 and 2016, household financial net worth increased by around 145 percentage points. However, some caution is needed interpreting this figure since financial net worth does not take into account housing assets which saw spectacular growth due to a bubble in house prices until it burst in 2007 followed by sharp declines afterwards.

Chart 7

Unemployment

The unemployment rate and the labour underutilisation rate (chart 8) also provide indications of potential vulnerabilities of the household sector. More generally, unemployment has a major impact on people’s well-being. The unemployment rate was 7.1% in Q4 2016, pursuing the downward trend observed since Q1 2012 when it reached a peak of 15.1%. The labour underutilisation rate takes into account the share of underemployed workers and discouraged job seekers. Since Q4 2015, this rate has been twice the size of the unemployment rate, compared with around one and half time pre-crisis, indicating higher slack in the labour market.

Chart 8

Overall, the last quarter of 2016 saw a continued increase in Irish households’ material wellbeing with income and consumption per capita continuing to expand, a further decline in debt, an increase in financial net worth (although total net worth still remains below its pre-crisis level ) and a fall in the unemployment rate. However, the savings rate increased in line with declining consumer confidence (although consumer confidence is now much higher than its pre-crisis level). And despite the continued fall in the unemployment rate, many workers would prefer to work more, as indicated by the remaining high level of the underemployment rate.

One should keep in mind that households’ income, consumption and savings may differ considerably across various groups of households; the same holds for households’ indebtedness and (financial) net worth. The OECD is working on these distributional aspects and preliminary results can be found here and here.

To fully grasp people’s overall well-being, one should go beyond material conditions, and also look at a range of other dimensions of what shapes people’s lives, as is done in the OECD Better Life Initiative.

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A strange headline from an Irish newspaper: “Buyers queue for ghost estate sale as homes go for half price”. Ghost estate? No, not an outbreak of the supernatural, just a reflection of the new normal in post-boom Ireland.

From the early 1990s up to just a few years ago, Ireland enjoyed an extraordinary run of economic growth, transforming itself from one of western Europe’s poorest countries to one of its richest. But during the 2000s, the Celtic Tiger’s boom gave way to a bubble as the economy became increasingly reliant on property. In the 12 years or so up to the peak of the market in 2006, house prices almost trebled. Construction came to account for more than a fifth of Irish GDP – getting on for double the EU average – and employed more than one in eight workers, or twice as many as in the mid-1990s.

It couldn’t last. From their peak, prices have now plunged – estimates vary from between about 37 and 42% – with even steeper falls in the capital, Dublin.

Those declines may well continue, in part because Ireland has a huge stockpile of empty houses – the so-called ghost estates. Again, estimates vary, but a figure of more than 300,000 vacant or abandoned houses is widely cited. To put that in context, Ireland has a population of just 4½ million.

Why did property prices explode in Ireland? In reality, it wasn’t alone. As a paper by the OECD’s Christophe André discusses, many OECD countries experienced what was effectively a synchronised property boom beginning in the mid-1990s. The boom was unusual for a number of reasons: It was very long – at about 12 years, it lasted for was about twice as long as previous price upturns; and it was very deep – prices rose by about 120% on average, more than double the 45% rise seen in previous property booms.

So, Ireland wasn’t unique, but it was unusual. While the financial crisis and recession that struck most OECD countries two years ago had its roots in the global economy, Ireland’s woes were – in the words of one official inquiry – largely “home-grown”. As another inquiry report explains, there was an excess of “budgetary measures aimed at boosting the construction sector” – in effect, tax breaks for property developments.

Irish banks played a major role, too, embarking on a lending binge to developers fuelled by cheap money borrowed on international markets. As the Financial Times reports, “[a]t the height of the lunacy, around three-quarters of the total lending by Irish banks – €420bn or about two and a half times the size of the economy – got bound up in property, construction and land speculation of one sort or another”.

This combination of policy incentives and easy lending can be blamed in part for another curious legacy of the Irish property bubble – the zombie hotel. Thanks in part to those generous tax breaks, a rash of new hotels opened over the past decade, and today there’s an estimated excess of 15,000 rooms. In a normal market, many of those empty new hotels would simply shut their doors. But to continue availing of allowances and tax breaks, they need to stay open. As a result, room rates have plunged, and are now back levels last seen in 1999. Good news for tourists, if no one else.

The lingering burden of such a property hangover would be heavy enough for any economy. But in Ireland’s case, the problem is exacerbated by the scale of its banks’ exposure to devalued property assets. To prevent collapses, the government has had to nationalise one financial institution, Anglo Irish Bank, and provide substantial support to another.

To cope with banks’ broader problems, the government has also set up a “bad bank” – the National Assets Management Agency, or Nama. This has already begun the process of transferring around €80 billion in devalued property assets from banks, which – in theory at least – will free their hands and allow them to begin lending again. The idea is controversial: The government says establishing Nama is the best way to restructure the country’s banking system; critics argue it’s forcing taxpayers to pick up the tab for banks’ recklessness.

Whatever it succeeds or not, Nama has already added another word to the lengthening lexicon of Ireland’s property bust, joining “ghost estates” and “zombie hotels”: The FT’s David Gardner spoke to one local who pointed to one of Dublin’s best-known hotels and told him, “That building there, it’s just been Nama-ed.”

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Immigrants were key drivers behind the economic boom, as they added skills and productivity to lift performance. Now, almost everywhere migrants are feeling the brunt of the crisis. Immigrants are particularly vulnerable during prolonged economic downturns, and this crisis has had the effect of throwing many immigrant workers out of work at a higher rate than for native-born workers. One reason is that immigrants tend to work in sectors which are sensitive to swings in the economic climate, that is, where demand for workers rises sharply in good times and drops fast during bad. (more…)